Injection of funds about more than COVID-19 immunity

Ramsay MD and CEO Craig McNally. Cartoon: Eric Lobbecke.

Ramsay Health Care’s super-sized $1.4bn capital raising means that chief executive Craig McNally is building some acquisition firepower and has a much wider agenda than insulating the company against COVID-19.

A few weeks ago, some investors got the impression from McNally that he had no intention of tapping investors for more funds, and that Ramsay’s lenders weren’t particularly stressed about their covenants.

It’s a tough pill to swallow if there’s been a perceived U-turn in the strategy less than a month later.

However, as one Ramsay watcher put it, if you’re looking for confirmation of an imminent capital raising, the last place you’re going to get it is from the company itself.

Ramsay said on Wednesday its lenders had agreed to change or waive key covenants up to and including the December testing date, and the company would temporarily suspend its dividend.

The first maturity date for a Ramsay facility is now October 2022.

In the meantime, the balance sheet will be strengthened, acting as a buffer in the volatile environment and positioning the company for “future growth opportunities”.

In this crazy COVID world, you can transform from hunted to hunter in a few short weeks.

McNally was quite explicit about his intentions: asked on an investor call if the lack of access by European healthcare operators to public funding could present acquisition opportunities in the future, the Ramsay chief said he was “continually looking at markets around the world”.

The first priority was the countries in which Ramsay already had a presence — Australia, Britain and France — and there was an increasing appetite for revenue growth from ancillary businesses outside private hospitals.

One of the issues Ramsay faces is whether it has a market mandate to pursue inorganic growth.

It lost the opportunity on Wednesday to consult with shareholders on a preferred acquisition, so the answer to the mandate question will remain open until McNally settles on his target.

At the very least, months will pass before the COVID-19 dust settles, enabling Ramsay to seriously evaluate what’s on offer.

McNally and his team also have to consider behavioural changes as a result of the crisis, and the likelihood that business models will evolve or face disruption.

After the raising, at $56 a share or a 13 per cent discount to the last closing price of $64.29, Ramsay group leverage will improve to 2.2 times EBITDA (earnings before interest, tax, depreciation and amortisation).

Liquidity for Ramsay Funding Group, which excludes the French unit Ramsay Sante and its covenant-lite debt, will be $2.1bn, with $594m in total liquidity for Ramsay Sante.

The Australian Securities ­Exchange has reaffirmed its ­reputation from the 2008 global financial crisis as a fountain of capital — it has supported 52 raisings worth $11.5bn since mid-March.

The ASX facilitated $92bn worth of deals in the GFC.

Investment bankers have also reaffirmed their reputations, advising boards to “go early and go hard” if they’re the slightest bit concerned about capital levels.

Bankers, who are determined to de-risk the underwriting process, have been deluging superannuation funds with calls to ascertain if they’ll support a raising.

As it reinforces its balance sheet, Ramsay has faced suspension of non-urgent elective surgery as its 500 locations in 11 countries supplement public health systems to help fight the coronavirus.

Some surgeries will resume at its 72 hospitals in Australia as a result of a decision by the national cabinet on Wednesday, which will be effective from April 27. Governments and health authorities have promised financial support as part of the suspension arrangements so Ramsay can treat COVID-19 patients.

The deal is to meet private hospital operators’ agreed operating costs, or in the case of France hand over about 85 per cent of revenue from the previous corresponding period.

Profits can’t be generated while the agreements are in force.

Ramsay also warned there was no guarantee that the level of financial recovery, the conditions attached to receiving any funds, and the ability to terminate the arrangements at a time that suited the company would be in line with existing arrangements.

But that was just one risk in about 20 pages of risk factors for potential investors.

It’s nothing more than you’d expect in the era of the coronavirus.

Banks unscathed

The collapse of Virgin Australia, which is Australia Inc’s first major casualty from the COVID-19 crisis, will barely leave a scratch mark in the accounts of the major banks.

It’s one less thing for investors to worry about as ANZ (April 30), Westpac (May 4) and National Australia Bank (May 7) prepare to release their profit announcements for the March half-year.

While Virgin collapsed with $5bn in debt, much of it was held by US bondholders, aircraft owners and lessors, airport terminal owners, ordinary trade creditors and employees.

The combined exposure of the nation’s banks is of the order of several hundred million dollars.

In the financial crisis, the big four made a habit of going straight to the confessional when a large corporate client collapsed, even when their exposures were less than material.

The intention was to prevent “rumourtrage”, or benefiting from share-price volatility by spreading false rumours.

In November 2008, for example, the implosion of Eddy Groves’ childcare empire ABC Learning and Allco Finance Group on consecutive days triggered a spate of announcements detailing individual bank exposures.

While Virgin had commercial banking relationships, the airline’s demise prompted no such rush of ASX announcements, with none of the big four on the books as a term-debt provider.

Westpac was the transaction bank, but its role was limited to provision of credit card facilities, and Commonwealth Bank was part of a syndicate which leased two relatively new aircraft to the carrier — one for Tigerair and the other for the parent.

CBA agreed to defer repayments on the lease but the gesture was overtaken by more significant events.

It could have been much worse for the big four.

As one senior banker said: “It wasn’t confessional day for us on Tuesday.

“We managed to dodge the first big one (from the COVID-19 pandemic).”

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